Recalculating Profits: Business Models: Communication
It is easy to talk at cross purposes about gross profit rates or margins. There are many expressions in common use and some trades have their own. The same word may even have different meanings. For instance, ‘margin’ may be a cash margin, a percentage margin on cost, or a percentage margin on sales. It is always vital to ensure that all parties to any discussion or correspondence are talking about the same thing.
Within the Department and within the accountancy profession two expressions do have a restricted meaning.
‘Gross profit rate’ will denote either
- the gross profit of a business as a whole expressed as a percentage of total sales
- the difference between the cost and sale price of an item expressed as a percentage of its sale price.
‘Rate of mark-up’ will denote either
- the gross profit of a business as a whole expressed as a percentage of cost of goods sold or the difference between cost and sale price of an item expressed as a percentage of its cost.
A business will normally have only one gross profit rate (namely, that for the business as a whole) derived possibly from dozens or even hundreds of different ‘mark-ups’ on individual lines.
Many traders will be familiar with the prevailing rate of gross profit in their line of business, and will have come across margins and mark-up rates. Where a taxpayer talks confidently and unambiguously, the discussion should take place in his or her terms. If the taxpayer is not confident in the subject, it is important to explain each step in detail. It is usually better to talk in cash terms related to the business rather than in ratios or percentages.